Top 5 considerations for NSW landlords and tenants

The economic fallout caused by the COVID-19 pandemic continues to drive uncertainty in the Australian property market. Mounting tensions in residential, retail and commercial leasing arrangements require tenants and landlords to be vigilant and proactive in monitoring their rights and obligations in this unprecedented environment.

The Covid Act was passed by NSW Parliament on 24 March 2020. The Act amends a number of pieces of NSW legislation by greatly expanding the regulation-making powers available under that legislation in response to the current pandemic. In the real estate context, affected legislation includes the Residential Tenancies Act 2010 (NSW) and Retail Leases Act 1994 (NSW) (Relevant Acts). It’s important to note that many commercial leases do not fall for consideration under the Retail Leases Act 1994 (NSW).

New regulation-making powers under the Relevant Acts

The Covid Act provides broad (yet similar) regulation-making powers under the Relevant Acts for both retail and residential premises. It enables regulations to be made (with an expiration date of six months) prohibiting landlords from:

repossessing premises in particular circumstances

terminating a lease in particular circumstances

exercising or enforcing certain rights available under a tenancy agreement or Relevant Act, and

exempting a tenant or class of tenants from the operation of a provision of a tenancy agreement or Relevant Act.

The phrase ‘in particular circumstances’ is not defined in the Act and remains to be determined by the regulations (which are not yet released).

How will commercial landlords and tenants be affected?

Although the Covid Act amendment to the Relevant Acts contemplated extending to ‘any other Act relating to the leasing of premises or land for commercial purposes’ (and potentially, more broadly to other, non-retail commercial tenancies), the National Cabinet announced on 7 April 2020 that all commercial leases (including retail, office and industrial leases) will be regulated by a mandatory commercial tenancy code of conduct (the Code).

The Code sets out good faith leasing principles to guide discussions between commercial landlords and tenants who are significantly affected by the COVID-19 pandemic. It will apply to tenants who are JobKeeper participants and a small or medium-sized enterprise with an annual turnover of less than $50 million.

The overarching principle of the Code is to ensure business continuity and to facilitate the resumption of normal trading activities at the end of the pandemic period. This is to be achieved by:

landlords and tenants working together to negotiate appropriate temporary leasing arrangements that achieve mutually satisfactory outcomes

landlords and tenants negotiating in good faith and in an open, honest and transparent manner

ensuring that any agreed arrangements are proportionate with regard to any pandemic impact on revenue, expenses and profitability and include a reasonably recovery period

dealing with leases on a case-by-case basis taking into account all pre-existing commercial factors (e.g. remaining term of lease).

In negotiating and enacting temporary arrangements under the Code, the following lease principles are to be applied:

landlords must not terminate leases due to non-payment of rent during the pandemic period and any subsequent recovery period

tenants must remain committed to the terms of their leases – tenants will not be able to rely on the protections provided under the Code if they fail to comply with other substantive terms of their lease

landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the ordinarily payable rent, based on the tenant’s reduction in trade during the pandemic period and any reasonable recovery period

if rental waivers are agreed between landlords and tenants,(and unless otherwise agreed between the parties), the waiver must constitute no less than a 50% reduction in rent payable

unless otherwise agreed between the landlord and the tenant, repayment of any deferred rent must be amortised over either the balance of the lease term or a period of no less than 24 months (whichever is greater), and other negotiated arrangements requiring repayment should ensure that repayment occurs over an extended period to avoid placing an undue financial burden on the tenant landlords must pass on any reductions in statutory charges (e.g. land tax, council rates) or insurance to tenants

landlords should waive recovery of other expenses during the period in which tenants are not able to trade

landlords must share the benefit of any deferral of loan repayments with tenants in a proportionate manner

no fees, interest or other charges should be applied to any rent payments which have been waived or deferred

landlords may not draw on a tenant’s security for the non-repayment of rent during the pandemic, including a reasonable recovery period

if necessary, lease terms should be extended to give tenants the opportunity to continue trading on their existing lease terms beyond the pandemic period, and any extension should be equivalent to any rent waiver or deferral period

other than for retail leases based on turnover rent, rental increases should not be enforced

landlords must not enforce opening hours if a tenant is forced to reduce its opening hours or cease trading during the pandemic

if landlords and tenants cannot reach agreement on leasing arrangements to deal with the effects of the pandemic, the applicable retail/commercial leasing dispute resolution processes relevant to the particular lease must be followed.

The Code is intended to complement existing legislation during the pandemic period. It is, however, necessary for state and territory governments to give legislative effect to the Code before it will be binding on commercial landlords and tenants in NSW.

Airbnb declared illegal in NSW

Relevantly for landlords and tenants of short-term rental accommodation (a dwelling used by a host to provide temporary accommodation on a commercial basis), on
6 April 2020 the NSW Government moved to effectively ban all short-term letting accommodation in NSW (including Airbnb and other options) due to the pandemic.

Landlords and tenants must immediately cease all short-term letting arrangements or risk significant fines if caught doing so without a ‘reasonable excuse’.

Top 5 considerations for landlords and tenants during the pandemic

The evolving relationship between landlord and tenant during the pandemic is an area presenting great uncertainty in the property market. The key considerations for landlords and tenants navigating their residential, retail and commercial leasing arrangements in this time of uncertainty include:

Landlords

Exercise a diplomatic and genuine approach with tenants during tenancy discussions to reach a suitable arrangement, recognising the varying circumstances of each tenancy.

Strike a deal – consider a rent reduction or rent deferral for a period of e.g three months, of an amount that is adequate for the tenant’s circumstances, considering the nature and extent of any shutdown on the tenant’s business. If rent is deferred, negotiate a quid pro quo arrangement whereby the tenant agrees to extend the lease term for that rent-free period.

Consider an outgoings reduction or a cost sharing approach to expenses during this period.

If confronted with an ‘opportunistic tenant’ voluntarily in breach of its lease obligations, reserve your termination rights under the lease. Despite an Australian Government moratorium on evictions now applying across NSW (prohibiting the eviction of tenants for a period of six months impacted by ‘severe rental distress’ and unable to pay rent), a landlord still may reserve its rights under the lease where that tenant is, in effect, flouting these government measures.

Adequately document any arrangement or consider a variation of lease to incorporate additional terms agreed by the parties to apply during the pandemic.

Tenants

Seek a rent reduction or rent deferral for a specified period or consider seeking a change to turnover rent to alleviate some rental distress during this period.

Consider the landlord’s financial needs (as well as your own) and try to negotiate a mutually acceptable position.

Despite the economic and societal uncertainty, your lease remains a legally binding contract and you remain bound by its terms (including the covenant to pay rent). If you voluntarily cease paying rent and you are not impacted by ‘severe rental distress’, you will be in breach and the landlord may reserve its termination rights under the lease. You should be aware that, in many leases, a landlord may have a right to recover all rent and other outgoings payable under the lease in the event of a termination.

A global pandemic arising from circumstances such as COVID-19 may not fall within a ‘force majeure’ event (check the terms of your lease) and you are unlikely to be able to use the pandemic to assert that your performance under the lease has been prevented due to common law principles of frustration.

If you are not financially impacted by the pandemic, the position of the Australian Government is for you to continue to comply with and honour your leasing arrangements.

For further information and assistance on the issues raised in this article please speak to the authors, Fiona Nelson – Partner, Wesley Hodgson – Lawyer, or your usual Moray & Agnew contact.

The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.